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Agriculture is normally heavily taxed at early stages of development, as it is the largest economic sector. There are several theoretical arguments for turning the terms of trade against agriculture in order to generate economic "surplus", namely investible resources, and most late developing countries such as those of Sub-Saharan Africa (SSA) have followed policies of "urban bias", by taxing agriculture in various forms. However, structural adjustment programs have invariably called for a decrease in taxation of the agricultural sector, and this appears to contradict the overall logic of development i.e. the transformation of mainly agrarian to mainly industrial economies. This provides the motivation for the present study.

The study reviews the arguments for and against agricultural taxation in a wider sense. From a strict public finance viewpoint, agricultural taxation must be viewed in a different light than when one is concerned with growth and the generation of investible resources. The first question posed is whether turning the terms of trade of agriculture is justified on development grounds. The second set of issues concerns the types of policies used for turning the terms of trade against agriculture. The study distinguishes between explicit and implicit forms of agricultural taxation and examines the consequences on GDP and worker welfare of agricultural nominal taxation under different patterns of economic adjustment. Finally the study investigates the response of developing economies to external shocks under different types of adjustment response.

The issues are examined both in an expository manner by reviewing and comparing the earlier literature, as well as more technically by the use of a stylized analytical model that permits the interaction of the overall economy and the agricultural sector. The analysis and discussion raises interesting questions concerning the types of policies that have been followed in the past as well as those that are being recommended in the context of structural adjustment programs. In particular, it tries to separate the issue of surplus generation via agricultural taxation from the issue of the (mis)appropriation of this surplus by the state, which seems to be the focus of most structural adjustment types of reforms.

T. Kelley White
Policy Analysis Division

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